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ENVIRONMENTAL POLICY ANALYSIS FOR DECISION MAKING THE ECONOMICS OF NON-MARKET GOODS AND RESOURCES VOLUME 1 Series Editor: Dr. Ian J. Bateman Dr. Ian J. Bateman is Professor of Environmental Economics at the School of Environmental Sciences, University of East Anglia (UEA), UK and Senior Fellow at both the Centre for Social and Economic Research on the Global Environment (CSERGE) and the Centre for the Economic and Behavioural Analysis of Risk and Decision (CEBARD), UEA. Professor Bateman is also Executive Editor of Environmental and Resources Economics, a journal published in cooperation with the European Association for Environmental and Resource Economists (EAERE). Aims and Scope The volumes which comprise The Economics of Non-Market Goods and Resources series have been specially commissioned to bring a new perspective to the greatest economic challenge facing society in the 21st Century; the successful incorporation of non-market goods within economic decision making. Only by addressing the complexity of the underlying issues raised by such a task can society hope to redirect global economies onto paths of sustainable development. To this end the series combines and contrasts perspectives from environmental, ecological and resource economics and contains a variety of volumes which will appeal to students, researchers, and decision makers at a range of expertise levels. The series will initially address two themes, the first examining the ways in which economists assess the value of non- market goods, the second looking at approaches to the sustainable use and management of such goods. These will be supplemented with further texts examining the fundamental theoretical and applied problems raised by public good decision making. For further information about the series and how to order, please visit our Website http :/www.wkap.nl/series.htm/ENGO Environmental Policy Analysis for Decision Making Edited by John Loomis Department of Agricultural and Resource Economics, Colorado State University, Colorado, U.S.A. and Gloria Helfand School of Natural Resources and the Environment, University of Michigan, Michigan, U.S.A. KLUWER ACADEMIC PUBLISHERS NEW YORK,BOSTON, DORDRECHT, LONDON, MOSCOW eBookISBN: 0-306-48023-9 Print ISBN: 0-7923-6500-3 ©2003 Kluwer Academic Publishers NewYork, Boston, Dordrecht, London, Moscow Print ©2001 Kluwer Academic Publishers Dordrecht All rights reserved No part of this eBook maybe reproducedor transmitted inanyform or byanymeans,electronic, mechanical, recording, or otherwise, without written consent from the Publisher Created in the United States of America Visit Kluwer Online at: http://kluweronline.com and Kluwer's eBookstore at: http://ebooks.kluweronline.com Contents Preface, Audiences for the Book and Acknowledgements 1 1 WHAT IS POLICY ANALYSIS, AND WHAT IS ITS ROLE IN THE POLICYPROCESS 1 1. What You Need To Know About Policy Analysis Before You Begin To Do It 1 2. Defining The Analysis 3 3. Ethical Concerns and Policy Analysis 10 4. Some Federal Requirements For Policy Analysis 15 5. Lessons From This Chapter 16 2 19 SCOPING THE POLICY ANALYSIS 19 1. Agreeing Upon An Analysis Budget 20 2. Use of The “With and Without” Principle 22 3. How Precise Should The Results Be? 26 4. Original vs. Secondary Data Sources 28 5. Conclusion 31 3 33 DECISION CRITERIA AND DECISION METHODS FOR POLICY ANALYSIS 33 1. To What Are The CriteriaApplied? 34 2. Decision Criteria 35 3. Decision Methods 41 4. Using Decision Criteria and Decision Methods 53 4 55 STEPS IN CONDUCTING AN ENVIRONMENTAL POLICY ANALYSIS 55 1. Step 1: Develop A Relationship With A Client 55 2. Step 2: Define Your Analysis Topic or Problem to be Addressed 56 vi 3. Step 3: Design The Analysis 56 4. Step 4: Data Collection 57 5. Step 5: Develop and Screen Alternatives 58 6. Step 6: Perform the Analysis 59 7. Step 7: Present Results 59 8. How to Use These Steps 60 5 63 MODELING 63 1. Defining a Model 64 2. Types of Models 65 3. Role of Assumptions in Models 66 4. Rationale For Use of Models 68 5. Issues To Consider in Building a Policy Analysis Model 70 6. Problems That Can Arise With Modeling 73 7. Case Study: Modeling Environmental Inequities 73 6 77 STATISTICAL ANALYSIS USING REGRESSION 77 1. What is a Regression? 78 2. Multiple Regression Models and Contour Maps 82 3. Steps in Running a Regression 84 4. Some Cautionary Notes About Regression Analysis 99 5. An Example: Testing For Environmental Racism 103 6. Summary 104 7 105 PRINCIPLES OF BENEFIT-COST ANALYSIS 105 1. What Is Benefit-Cost Analysis? 105 2. Use Of The “With and Without” Principle 107 3. Conceptual Foundation Of Benefit-Cost Analysis 107 4. Role Of Accounting Stance in Determining Transfers 114 5. Gross Willingness to Pay, Cost, and Net Benefits 116 6. Measurement Of Economic Efficiency Benefits 120 7. A Note On Willingness to Pay Versus Willingness To Accept 132 8. Difficulties in Applying BCA in Environmental Policy Analysis 134 vii 8 141 DISCOUNTING BENEFITS AND COSTS OVER TIME 141 1. Discounting Process 142 2. Selecting the Interest or Discount Rate 145 3. What Federal Agencies Use 148 4. Alternative Benefit-Cost Decision Criteria 150 5. Sensitivity Analysis to Address Uncertainty 156 9 159 VALUATION OF ENVIRONMENTAL RESOURCES AND QUALITY 159 1. Common Methodological Approaches to Valuation Of Quasi-Marketed Natural Resources 160 2. Valuation of Nonmarketed Natural Resources and Environmental Quality 163 3. Combining Stated and Revealed Preference Methods 202 4. Quantifying HealthBenefits of Environmental Policies 202 5. Benefit Transfer 206 6. Use of Valuation Methods By Federal and State Agencies 210 7. Conclusion 210 10 213 REGIONAL ECONOMIC ANALYSIS, INPUT-OUTPUT MODELS AND MULTIPLIERS 213 1. Need For Regional Economic Analysis in The Policy Process 213 2. Traditional Concepts of Regional Economic Analysis 214 3. Input-Output Models: A Simple Model of a Local Economy 219 4. Assumptions of Input-Output Models 227 5. Development of Input-Output Models: The Survey Based Approach 229 6. Use Of Existing Input-Output Models 230 7. Example Application of IO Models and The Importance of Statistically Estimating The Initial Direct Effects 233 8. Putting Local Changes in Income and Employment in Perspective 237 9. Conclusion 239 viii 11 241 OPTIMIZATION AND LINEAR PROGRAMMING 241 1. The Elements Of a Constrained Optimization Problem 242 2. Example: National Forest Management 251 3. Building An Optimization Model 259 4. Linear Versus Nonlinear Programming 260 5. Uses Of Optimization 265 12 267 RISK ANALYSIS 267 1. What is Risk Analysis? 267 2. Overview Of Risk Analysis 272 3. Legal Basis For Risk Analysis 274 4. Steps in a Risk Analysis 275 5. Examples of Risk Analysis: Health Benefit Assessments 281 6. Case Study Of Annular Disposal of Oil Drilling Brine Wastes 283 7. Ecological Risk Analysis of USDA Conservation Programs 288 13 291 EXAMPLES OF POLICY ANALYSES 291 1. Decisions Using Matrices: An Example From U.S. Forest Service EIS 292 2.Comparing Recreation Values To Hydropower in Hydropower Relicensing 298 3. Regulating Non-Point Source Water Pollution 305 4. Summary 310 14 311 CONCLUDING GUIDANCE 311 1. General Principles 311 2. Guidance For Doing the Analysis 312 3. The Role of Policy Analysis in The Policy Process 316 References 317 Index 327 PREFACE 1. ENVIRONMENTAL POLICY ANALYSIS: WHAT AND WHY? Why environmental policy analysis? Environmental issues are growing in visibility in local, national, and world arenas, as a myriad of human activities leads to increased impacts on the natural world. Issues such as climate change, endangered species, wilderness protection, and energy use are regularly on the front pages of newspapers. Governments at all levels are struggling with how to address these issues. Environmental policy analysis is intended to present the environmental and social impacts of policies, in the hope that better decisions will result when people have better information on which to base those decisions. Conducting environmental policy analysisrequires people who understand what it is and how to do it. Interpreting it also requires those skills. We hope that this book will increase the abilities, both of analysts and of decision-makers, to understand and interpret the impacts of environmental policies. Policy analysis books almost invariably begin by pointing out that policy analysis can take many forms. This book is no different. As you will see in Chapter 1, we consider policy analysis to be information provided for the policy process. That information can take many forms, from sophisticated empirical analysis to general theoretical results, from summary statistics to game theoretic strategies. The form of policy analysis that we present here draws from the experiences that each of us has had in conducting policy analyses, and those experiences are shaped by the fact that both of us are economists. We cannot cover all the necessary topics, especially for a subject as large and varied as environmental policy. Nor do we claim that every policy analysis must include all the topics that we present. Still, we hope and expect that this book provides a number of useful concepts and tools that will assist many people involved in policy. ix